Valuentum Exclusive Analysis for the Discerning Investor

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Netflix Reports Mixed Third Quarter Results
Image Source: Netflix. Looking to the fourth quarter, Netflix expects revenue growth of 17% (16% on a currency-neutral basis) thanks in part to growth in members, pricing, and ad revenue. The company projects an operating margin of 23.9%, representing a two percentage-point improvement year-over-year. For 2025, it expects to record $45.1 billion in revenue (16% growth, 17% on a currency-neutral basis), a level that is in line with the company’s prior expectations calling for 15%-16% revenue growth (16%-17% on a currency neutral basis). Though revenue growth remains robust, Netflix now forecasts a 2025 operating margin of 29%, which is below prior expectations calling for a 30% reported operating margin due to the impact of the Brazilian tax matter. Management expects 2025 free cash flow of roughly $9 billion (+/- a few hundred million dollars), up from its prior forecast of $8-$8.5 billion. It ended the quarter with gross debt of $14.5 billion and cash of $9.3 billion.

Netflix Raises 2025 Revenue and Margin Guidance
Image Source: Netflix. During the second quarter, Netflix generated cash from operating activities of $2.4 billion versus $1.3 billion in the prior-year period. Free cash flow in the second quarter totaled $2.3 billion versus $1.2 billion in the year-ago period. Netflix raised its full year 2025 free cash flow forecast to the range of $8-$8.5 billion from approximately $8 billion due to continued strength in revenue and margin performance. The company ended the quarter with gross debt of $14.5 billion and cash and cash equivalents of $8.2 billion. We liked Netflix’s second quarter and outlook, but we don’t include shares in any newsletter portfolio.

3 Undervalued Stocks to Consider Buying Now
All told, we think these three names are ripe for the picking. UnitedHealth Group has clearly plummeted on bad headline news, while the market is not giving Nvidia enough credit for the sustainability of its technology. Alphabet is being weighed down by antitrust issues and the concern that artificial intelligence will permanently alter its business model, which we believe will not happen anytime soon, if at all. All three ideas are included in the Best Ideas Newsletter portfolio, where we include a diversified portfolio of ideas for members to consider. Happy investing!

Magnificent 7 Earnings Reports Not Bad Thus Far
Shortly after Trump's Liberation Day, where the President unveiled lofty tariffs on numerous countries, we released our wait-and-see outlook for the equity markets, which thus far has proven to be the right move, with the markets largely recovering from the depths reached in April. The S&P 500, for example, is down just 3.3% year-to-date, excluding dividends. A lot has happened since Liberation Day, including easing of tariffs to a 10% baseline for most, if not all, countries, with the key exception of China, where tariffs remain extremely elevated and prohibitive. Many countries are now reportedly negotiating trade agreements with the White House, and we expect China to be added to that list soon, even if a full US/China trade agreement won't be completed in the near term, as full-scale trade deals take time to mold. Thus far, we have been impressed by earnings this season, particularly by the Magnificent 7.

Netflix’s Operating Margin Continues to Delight
Image: Netflix has a long runway of growth given market share opportunities. Looking to the second quarter, Netflix expects revenue growth of 15.4% (17% on a foreign exchange neutral basis) as the company benefits from recent price changes and ongoing strength in membership and advertising sales. The company expects an operating margin of 33.3% in the quarter, roughly 6 percentage points better on a year-over-year basis. Netflix continues to expect 2025 revenue in the range of $43.5-$44.5 billion and an operating margin of 29% based on foreign exchange rate levels at the start of the year. We like Netflx’s market share growth opportunities and view shares as relatively immune to tariff pressures and broader macroeconomic uncertainty. Our fair value estimate stands at $1,060 per share.

Trump Tariffs Higher than Expected; What We're Doing
The Trump tariff increases came in larger than what we were expecting, and it remains to be seen how they will flow through the global economy, as we monitor potential retaliatory tariffs from other countries. As it relates to the equity markets, we’re taking a wait and see approach at the moment as we monitor new policy changes related to trade, immigration, fiscal (tax), and regulations. In short, we’re not overreacting to the sell off as we won’t have a great handle on the tariff impact to companies for a few quarters when they report results post-tariff increases. That said, we’re expecting continued market volatility, with meaningful risk to the downside, before trade uncertainty alleviates in the coming months.

Netflix Records Biggest Quarter of Net Adds in Its History
Image Source: Netflix. Looking to 2025, Netflix expects revenue to be between $43.5-$44.5 billion (12%-14% year-over-year growth), up $500 million from its prior forecast (despite foreign currency headwinds) and an operating margin of 29%, up one percentage point from its prior forecast and two percentage points higher than the 27% operating margin in 2024. Management noted that the return in 2025 of its biggest shows (Squid Game, Wednesday and Stranger Things) gives it optimism heading into the new year.

Netflix Continues to Deliver on Content and Engagement, Free Cash Flow Robust
Image: Netflix’s shares are trading at all-time highs. We liked Netflix’s revenue and operating income improvement in the third quarter, as well as its outlook for the fourth quarter of 2024 and 2025. Netflix is delivering with respect to content and customer engagement, and we like the fact that the firm continues to generate strong free cash flow. Netflix continues to build its advertising business, with ads membership up 35% on a sequential basis. Looking to the fourth quarter, Netflix has a nice slate of content, including Squid Game S2, the Jake Paul/Mike Tyson fight, and two NFL games on Christmas day, which Netflix expects to drive paid net additions higher in the quarter than in its most recently reported third quarter. The high end of our fair value estimate range for Netflix is $867 per share.

Brain Teaser - Reflexive versus Reflective
Image: Amy Leonard. Valuation multiples tend to trigger the reflexive side of our brain, and we process the multiples through anchoring. On the other hand, enterprise valuation, or the process required to answer the questions (in this article) correctly, shows that our reflexive process can be quite incorrect at times. In fact, cognitive biases such as anchoring can completely trip us up into missing out on truly undervalued companies that may have high P/E ratios while baiting us into value traps with low P/E ratios.

The Difference Between Speculation and Investment
In this edited video transcript, Brian Nelson, President of Investment Research at Valuentum, discusses the difference between speculation and investment.